Clinton Land Dream Turns Into Political Nightmare : Inquiry: The Arkansas investment was a basic get-rich idea gone bad. But ties to banker weave a complex web.

By DOUGLAS FRANTZ and WILLIAM C. REMPEL

Jan. 31, 1994 12 AM PT

TIMES STAFF WRITERS

LITTLE ROCK, Ark. — Many have had the dream of getting rich through real estate, and Bill Clinton, then the attorney general of Arkansas, was no different from countless others when he and his wife chased that dream in 1978 by becoming partners in a venture known as Whitewater Estates.

Chris Wade, the real estate agent who handled sales for Whitewater, said he remembers Clinton telling him about his hopes for making money--and perhaps even settling down--on scenic property in the Ozark Mountains of northern Arkansas.

“It’s really pretty up there,” Wade said Clinton told him shortly after the Clintons and two friends bought 230 acres in 1978. “Why don’t you pick me out a lot. I might retire up here.”

Today, Whitewater has turned into a political nightmare for President Clinton and his wife, Hillary Rodham Clinton, becoming the subject of a broad federal investigation into the their financial dealings during their years in Arkansas.

The fundamental allegation by critics is that the project was a “sweetheart” deal arranged by the Clintons’ Whitewater partner, James B. McDougal, to provide the Clintons with low-risk profits with little investment by them.

There are also questions about whether money from McDougal’s savings and loan was mingled in the venture’s accounts to help keep the project afloat.

There have also been suggestions that political clout from Clinton, who moved on to the governorship, may have subsequently helped delay the foundering S&L;’s day of judgment before federal regulators and that Clinton’s campaign treasury may have benefited from donations from the S&L.;

When it was disclosed in December that Whitewater records were removed from the office of White House deputy counsel Vincent Foster after his suicide last July--and then that the papers were kept from investigators--suspicions escalated rapidly.

Clinton gave in to subsequent congressional and public pressure and agreed to the appointment of a special counsel, who is now beginning to investigate the affair.

The expanding trail of leads and political charges drew much attention to Whitewater, the affair, but left Whitewater, the real estate venture itself, only more obscure.

In recent weeks, Times reporters have interviewed more than 30 people associated with the project and reviewed hundreds of pages of records in an attempt to reconstruct what happened.

Aspects of the venture remain tangled in an underbrush of small-time real estate deals and missing documents. However, the evidence now available seems to offer more support than contravention for two core claims made by the Clintons: that rather than rewarding them financially, Whitewater was a money-loser and that during the key phases of the project, the Clintons seemed to exercise little management control.

At the same time, the records and interviews document several transactions that raise questions about the venture:

* How much was paid for a prime lot at the development, one that Wade said had originally been set aside for Clinton, and where did the money go?

* What does a loan taken out by Hillary Clinton to help Whitewater indicate about her involvement in the project?

* Is there a connection between the eventual sale of the Clinton-McDougal interest in the venture and the messy finances of McDougal’s S&L;?

THE PARTNERSHIP

It was McDougal who in 1978 came up with the idea to cash in on the Sun Belt land boom by developing lots for vacation and retirement homes along the White River. The waterway is famous for its trout fishing and rafting. Similar developments were springing up in Florida, Georgia and Texas.

McDougal had known Clinton since they had both worked for Sen. J. William Fulbright, the powerful Arkansas Democrat, in the late 1960s. McDougal had later made some successful property investments, including some for Fulbright. Clinton, meanwhile, had been elected attorney general and McDougal offered to help his friend build a financial future.

“I thought this was going to be a sure winner,” McDougal said of the Whitewater project in an interview last fall.

On Aug. 2, 1978, the Clintons joined with McDougal and his wife, Susan, to form a partnership. They paid $203,000 for the land. The couples borrowed the entire purchase price from two small Arkansas banks.

Slightly over a year later, they transferred the land to the newly formed Whitewater Development Co., a 50-50 partnership. After making basic improvements, they valued the land at $250,000 and named the remote subdivision Whitewater Estates.

THE LOT

Wade, a local real estate agent who served as the salesman for the project, said he was overseeing the surveying when Clinton asked him to pick out a prime location. Bruce Lindsey, a senior White House aide and longtime Clinton friend, says the President remembers it slightly differently: that someone suggested that land had been set aside for him.

But no one disputes the lot’s appeal. Lot 7 was 27 acres high above the river. It was the largest of all the lots and was, in the words of one Whitewater customer, “absolutely gorgeous.”

But Clinton’s interest later waned and sometime in 1980, Lot 7 was placed on the market.

Tax stamps, which indicate the sales price in a real estate transaction, show that Whitewater sold Lot 7 to Wade on Oct. 14, 1980, for $2,000. The following day, Wade sold the property to a Houston doctor, M.T. Bronstad, for $35,000. Bronstad said he paid cash for the lot.

The indicated price of $2,000 for 27 of the best acres and Wade’s apparent windfall have raised eyebrows among those examining the Whitewater matter. Why would the Clinton-McDougal development, later to be characterized as a money-losing venture, virtually give away a choice property?

Wade says Whitewater was not shortchanged. “Someone made a mistake on the revenue stamps,” he said. “I paid $33,000 and only made a little money when I sold it to Bronstad.”

Lindsey said the Clintons have no idea what Wade paid because Whitewater’s operations were run by McDougal.

HILLARY CLINTON’S LOAN

To stimulate sales in late 1980, the Whitewater partners decided to put a model home on one of the lots. Lindsey said McDougal asked the Clintons to come up with the money for the house because the McDougals had already paid for subdivision improvements.

On Dec. 16, 1980, Hillary Clinton took out a $30,000 personal mortgage to finance the home and acquire title to a Whitewater lot on which to build it.

The mortgage loan was made by the Bank of Kingston, a tiny institution in distant Madison County, Ark., that had recently been purchased by McDougal. Whitewater Development could not borrow the money because its only asset--the White River land--was already pledged as collateral for the current loans.

Hillary Clinton in turn loaned the $30,000 to Whitewater to build the house and pay other expenses connected with the development. This also helped sidestep any possible questions about a federally insured institution--the Bank of Kingston--lending money to the personal ventures of one of its owners, McDougal.

FINANCIAL SQUEEZE

In 1981, the model home was sold and several other parcels of four to six acres each were sold for $10,000 to $12,000. The prices were not high, but land was moving and revenue was generated to help pay the loans.

Many early buyers were middle-class people looking for inexpensive retirement or vacation property. Among them was Douglas Murdock, a lawyer who now lives in Thousand Oaks, Calif.

“My parents were investing in the area and it was just a matter of wanting to own some land,” said Murdock, who paid $11,000 for five acres on the river in 1981. “I realize that there was a question about whether it was so far out in the boondocks that it would never amount to anything, but it was cheap.”

Buyers interviewed said they either didn’t know or didn’t care that the then-governor had a stake in the development. “We heard he was one of the owners, but it didn’t make any difference one way or the other,” said owner Maryanne Cammarata, who lives in Summit, Ark. “We just wanted some land on the river.”

Most early lots were purchased on installment contracts. Buyers put down 10% and made monthly payments for seven years. Whitewater used the revenue to make payments on its loans, and the deeds were retained by the banks.

But Arkansas law restricted the interest that sellers could charge on installment contracts to 10%. In the early 1980s, as the nation’s prime interest rate soared above 20%, the Clinton-McDougal partnership ended up paying more for its Whitewater loans than it could recover from sales of the land.

Then sales dried up too.

Nearly half of the 44 lots were sold in the first two years, but no sales were recorded in 1982. Land records show that from 1982 through 1984, only two additional lots were sold.

Gary Fancher, a businessman in nearby Flippin, was trying to develop a smaller piece of property near Whitewater in the early 1980s when he got caught in the same squeeze.

“People just stopped coming to buy land and we were left holding the bag,” he said. “The Clintons got caught in the shorts, like others up here.”

The phenomenon was repeated across the Sun Belt as projects went bust or developers tried to hold on long enough for the economy to change. For the Clintons and McDougals, the dream of getting rich was replaced by a dream of getting out.

SELLING OUT

A former associate of the Clintons’ said Hillary Clinton had been wary of the investment from the start, and, as conditions deteriorated, she repeatedly urged her husband to end the partnership.

“She didn’t like McDougal and she didn’t like Whitewater,” said the associate, who spoke on the condition that his name not be used.

It was Wade who came to the rescue. Wade said McDougal approached him in the spring of 1985 about the unsold lots, saying: “I’m tired of messing with this thing. Why don’t you just buy ‘em?”

Wade formed a partnership with Russell Webb, a urologist in Mountain Home, Ark., and they acquired the 24 remaining lots. In exchange, Wade and Webb gave Whitewater a Cessna airplane valued at $35,000 and assumed about $35,000 of Whitewater’s outstanding loans on the land, according to records and interviews.

Lindsey said McDougal later sold the Cessna and pocketed the proceeds as a commission for the sale to Wade and Webb. He said the Clintons did not learn of the sale of Whitewater’s remaining lots until after it was completed in May, 1985.

Others have questioned whether this transaction was related to other events occurring during this period. In April of that year, McDougal held a fund-raiser at his savings and loan, Madison Guaranty, that raised $35,000 toward Clinton’s $50,000 1984 campaign debt.

Meanwhile, Hillary Clinton, on retainer as a lawyer for Madison Guaranty, successfully petitioned the Clinton-appointed state securities commissioner to approve a recapitalization plan for the institution, which was weakened by bad loans.

The White House has asserted that the matters were unrelated, and the commissioner, Beverly Bassett Schaffer, has said she showed no favoritism. But critics have expressed doubts.

Through it all, Whitewater continued to be a financial headache. Although the lots had been sold, the Clintons and McDougals were still obligated to make the payments on the original purchase loans.

The Clintons’ tax returns show deductions for Whitewater interest payments of $19,021 between 1980 and 1988. Lindsey said the couple’s 1978 and 1979 returns show $22,000 in interest deductions related to Whitewater.

The remainder of the $68,900 that the Clintons say they lost on Whitewater was financial contributions to the company that were not tax-deductible, according to James M. Lyons, a Denver lawyer who examined the Whitewater transactions for the Clintons.

McDougal told the Associated Press that he believes that the Clintons lost far less in Whitewater. He said his “records” showed a loss for them of about $9,000. But he acknowledged that his “records” were his memory.

POWER OF ATTORNEY

Whitewater continued to be a financial problem for the Clintons into the late 1980s. Occasionally, property buyers defaulted on their purchases and the lots were returned to the development company for resale.

Wade, who was the agent for those lots as well as his own, said completing the resales was difficult because of turmoil in the McDougals’ personal lives.

McDougal’s S&L; had collapsed, and he was unemployed, under investigation and under psychiatric care for severe depression, according to records. His marriage had broken up, and his wife had moved to Los Angeles.

“I couldn’t find Jim or Susan, and we had these two lots we needed to sell,” Wade said. “So I called Mrs. Clinton and asked her to see about getting a power of attorney to approve the sales.”

On Nov. 28, 1988, Hillary Clinton wrote a letter to McDougal asking for a power of attorney authorizing her to sell the lots and pay off the bank loans.

“I hope we’ll be able to get all that behind us by the end of the year,” she wrote.

Hillary Clinton’s letter has raised questions about whether the Clintons were, in fact, passive investors or whether she had taken direct action in managing the ill-fated project and is thereby more directly linked to questionable dealings at the venture and at Madison Guaranty.

Lindsey said McDougal never returned a signed power of attorney. Wade said McDougal contacted him shortly after receiving Hillary Clinton’s letter and approved the sales.

The Clintons remained partners in Whitewater Development until late 1992, when they sold their interest to McDougal for a nominal $1,000. The transaction was handled by Foster.

McDougal said last fall that Whitewater was his first money-losing venture in real estate, and he regretted the losses sustained by the Clintons. “I wanted to help Bill Clinton make some money,” he said.

But today there is little to show for the development. A handful of mobile homes and fishing shacks are scattered across the largely undeveloped land, along with a couple of homes.

John Lauramoore, a carpenter, now lives in one of the homes, the model built with Hillary Clinton’s money on Lot 13.

“What happened to Clinton happened to a lot of developers,” Lauramoore said. “He went in on a land deal to make a buck and lost his shirt.”